Apple Walks Fine Line Between Cheapness And Chic With iPhone 5C

It was just last month that Apple released iPhone 5C with fanfare. It was the first time that Apple had introduced two iPhones at the same time. Also iPhone 5C was the first ever mid-market phone introduced by Apple.

Two data points show that iPhone 5C has hastened a march to the bottom.

First, major retailers such as Best Buy (BBY), Radio Shack (RSH), and Wal-Mart (WMT) started giving out big discounts on iPhone 5C. Best Buy and Radio Shack advertised cuts as limited time deals. However, both stores still price match and the phone can be had at a deep discount. Apple had priced iPhone 5C at $99 with a two year contract. The phone can be had at Wal-Mart now for $45. It is common for price discounts to appear on a phone that nears the end of it prime life cycle. I have never seen more than 50% discount on an iPhone so soon after the launch.

Could it be that iPhone 5C was not selling well and retailers had to discount to get rid of the inventory? Could it be that retailers were using iPhone 5C as a loss leader to attract traffic? To determine an answer, I conducted a survey at 20 iPhone retail outlets. The conclusion from the survey is that iPhone 5C is not selling well. The survey also showed that consumers prefer iPhone 5S by a wide margin.

The second data point came from a report from the Wall Street Journal confirmed by Reuters. The Journal reported that Hon Hai Precision Industry orders for iPhone 5C have been cut by 33%. Reuters reported that iPhone 5C orders from Pegatron Corp have been cut by 20%.

Now that the race to the bottom has started, it will not take long before iPhone 5C becomes free with a contract.

In three ways, iPhone 5C not selling well is a blessing in disguise. First, the actual mix between iPhone 5C and iPhone 5S will be different from most analysts’ models. The changed mix towards iPhone 5S favors higher revenues and higher gross margins for Apple for this quarter.

Second, the deep discounting is helping exposure to Apple phones to many low-end buyers who may have otherwise considered a Google Android phone as they upgrade from feature phones.

Third, the survey shows that iPhone 5C discounts have resulted in attracting more traffic to the stores. Retailers are using this traffic to sell not only phones but more accessories. Accessories typically carry higher margins for retailers.

Wal-Mart is simply too big for these additional sales to move the needle. However, the additional traffic will help increase earnings for the likes of Best Buy and Radio Shack. The problem is that lower consumer interest in iPhone 5C, Android phones are gaining more market share.

With Apple facing stiff competition, Apple can ill afford a product mistake. It is too early to tell conclusively if iPhone 5C was a mistake but it is increasingly looking like it was a mistake. The smartphone market in the U. S. is near saturation. The growth is in emerging markets and that is where Apple’s Achilles heel has lied. In many emerging markets, carriers do not subsidize phones. In such markets, an unsubsidized price of $549 for iPhone 5C is simply not competitive.

Apple’s legacy, built by Steve Jobs, is such that to date it has enjoyed the luxury of loyal fans buying its products even when they are not competitive from a pricing point of view. My survey shows that iPhone 5C has failed at its prime strategic objective of extending Apple’s hold on consumers who are not existing Apple customers. This shows that Apple is vulnerable and the long-term iPhone growth projections of many analysts may turn out to be too optimistic.

I am an engineer and nuclear physicist, have founded two Inc. 500 fastest growing companies, have been involved in over 50 entrepreneurial ventures and now edit four investment newsletters at The Arora Report. The credit for my enviable performance record goes to my high...